The inflation adjustments to various provisions of the tax code increase significantly in 2023 due partly to rising consumer prices and persistent inflation. It is important to consider these changes as you engage in estate planning and preparing for tax efficiency this year and in the years ahead. In some instances, you could find yourself in different tax brackets with different marginal tax rates in 2023 and 2022.
Income Tax Brackets
The top income tax rate of 37 percent applies to individuals with 2023 income above $578,125, or $693,750 for married couples filing jointly. A 35 percent tax rate applies to individual income above $231,250 (or $462,500 for married couples filing jointly) and a 32 percent tax bracket for individuals with income exceeding $182,100 ($364,200 for married couples filing jointly).
For trusts and estates, the 2023 income tax brackets break down as follows:
Federal Estate and Gift Taxes
The individual estate-tax exemption in 2023 increases to $12,920,000 (or $25,840,000 for married couples filing joint tax returns), up from $12,060,000 for the estates of decedents who died in 2022 (or $24,120,000 for married couples filing jointly in 2022). Depending on where you live, your estate may also be subject to estate and inheritance taxes at the local and state level.
The maximum you may gift tax-free in 2023 to people other than your spouse without using up any of your lifetime gifts or estate tax exemptions increases to $17,000 (or $24,000 for married couples filing jointly), up from $16,000 in 2022. Married spouses who are both U.S. citizens may continue to make an unlimited number of tax-free gifts to each other. When one spouse is a non-U.S. citizen, however, only the first $175,000 of a spousal gift may be excluded from the total amount of taxable gifts for 2023.
With three years to go until the federal estate tax exemption is reduced by more than half, it is essential for individuals with substantial wealth to make gifts and implement other estate planning strategies to remove highly appreciated assets outside of their taxable estates.
Alternative Minimum Tax (AMT)
For individual taxpayers, the AMT exemption in 2023 is $81,300 and begins to phase out at $578,150 ($126,500 for married couples filing jointly for whom the exemption begins to phase out at $1,156,300).
Deductions for Pass-Through Business Owners
The Section 199A deduction of up to 20 percent of qualified business income (QBI) available to eligible sole proprietors and owners of pass-through businesses (i.e. S Corporations) is subject to income limitations. For 2023, the deduction is reduced when taxable income exceeds $182,100 for individuals, or $364,200 for married couples filing jointly, and is phased out completely when individual income reaches $232,100, or $464,200 for married couples filing jointly.
Contributions to Retirement Plans
The maximum amount you may contribute via salary deferral to an employer-sponsored 401(k) or 403(b) retirement savings plan in 2023 is $22,500, up from $20,500 last year. If you are age 50 or older, you may make an additional $7,500 in catch-up contributions, allowing you to put aside as much as $30,000 for your eventual retirement. The maximum amount you may contribute to an IRA or Roth IRA also increases in 2023 to $6,500 plus an additional $1,000 for qualifying savers age 50 and older.
About the Author: Scott Montgomery is a director and financial planner with Provenance Wealth Advisors (PWA), an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs and a registered representative with PWA Securities, LLC (PWAS). He can be reached at the firm’s Ft. Lauderdale, Fla. office at (954) 712-8888 or info@provwealth.com.
Provenance Wealth Advisors (PWA), 200 E. Las Olas Blvd., 19th Floor, Ft. Lauderdale, Fla. 33301 (954) 712-8888.
Scott Montgomery is a registered representative of and offers securities through PWA Securities, LLC, Member FINRA/SIPC.
This material is being provided for information purposes only and is not a complete description or a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no guarantee that these statements, opinions or forecasts provided herein will prove correct.
Any opinions are those of the advisors of PWA and not necessarily those of PWA Securities, LLC. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of PWAS, we are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Prior to making any investment decision, please consult your financial advisor about your individual situation.
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Updated February 5, 2024